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You can be successful if you question what everyone else knows—and the patience to wait for the inevitable

At Delphi in Greece, the god Apollo was supposed to speak through his oracle, a priestess known as the Pythia. The Pythia sat on a tripod seat over an opening in the earth. The fumes from the opening were supposed to allow the Pythia to channel the god and give her a vision of the future. Some sources depict the Pythia as delivering her prophesies in an agitated state and speaking in a strange and unintelligible voice. These ravings were interpreted by priests and reshaped into enigmatic prophecies that have been preserved in Greek literature. We like to think that economic and financial predictions are much better, but has anything really changed?

In a recent conference held at King's College, Cambridge a group of economists including five Nobel laureates, could neither agree on the cause of the crisis nor the necessary remedies. They did agree ‘that the financial and economic crisis had exposed fatal flaws in their subject and ideas were urgently needed to keep economics relevant.’ In a lecture last year, Economics Nobel laureate and columnist, Paul Krugman stated that most macroeconomics of the past 30 years was ‘spectacularly useless at best and positively harmful at worst’. Ouch!
Last week in the US, we were entertained to see two of the most highly-paid former executives of Citigroup hauled before a Congressional committee. Former CEO Charles Prince said he was sorry three times. His defense was that ‘Citigroup could have lost its market share or key employees’ if it stopped the speculation. Of course, the option of bankrupting the company was apparently a better idea.

Robert Rubin, the former Goldman Sachs executive, US treasury secretary and chairman of Citigroup's executive committee denied he had anything to do with it. This denial forced the Phil Angelides, the panel's chairman to remark, “Either you were pulling the levers or asleep at the switch.”

So why are we paying these people billions of dollars in compensation? Professor Gratton of the London Business School pointed out that in theory these giants of finance are paid huge sums, because ‘they are particularly skilful, and that they have information that is valuable. Now, the interesting thing from an academic perspective is that there isn’t really any research to show that what they do is particularly skilful.’

Well, I don’t think that is quite true. What they do is particularly skillful. The reality is that no one, not the world’s best economists, not the best financial analysts, not even Goldman Sachs can predict the future. What they are really skilful at doing is selling. They were really good at selling the idea that they can actually use the financial and economic wizardry to predict the future.

This then is the basis for much of what passes for financial advice and the entire financial industry. It is not about the skill, because no one has the skill to do more than guess as to what is about to happen. The skill that they do have is to market the idea that somehow their methods, their research, their algorithms, their high speed computers are somehow better than the next guy or even a dart board.
There is another skill that some people may actually have. The problem is that we do not know which ones. The skill has to do with information. Some people have access to it while others do not.

Markets are supposed to be efficient and economics is supposed to function according to theory if and only if accurate, complete and timely information is available to all participants at the same time. The reality is that even in the most open and efficient markets policed by well-funded and well-supported securities watchdogs, all information does not get to the market. Some of it goes to certain individuals or institutions, which can make them lot of money.

For example, an American bank, WaMu was a major player in originating sub-prime mortgages. According to an internal WaMu report dated September 2007, a review of 132 loans found ‘confirmed fraud’ in 115 cases. Goldman Sachs is charged by the US securities watchdog of creating an investment vehicle for one of their customers that based on information available to Goldman, was designed to fail. In both cases the highly compensated executives of WaMu and Goldman had the information and the rest of us did not.

If the quality and quantity of information in developed markets is subject to question, it is far worse in emerging markets. In a prior piece I discussed the problems with information provided by State-owned and family companies.
The lesson for investors is that the powerful tool is not information, but the knowledge that the information is distorted. The truth is that money is a limited quantity and despite the spin, the stories, exaggerations, misrepresentations and even outright falsehoods, it eventually runs out and the truth is exposed. You can be successful if you have sufficient doubt to question what everyone else knows and the patience to wait for the inevitable.